Which of the 2 is most likely presented on a common-size balance shet or common-size income statement? a) total aset turnover b) Operating Profit Margin Ans : b Shouldnt it be a) total asset turnover? If not why? THanks!
Asset T/O = Sales/Avg Total Assets but on a common size BS you show things as a percentage of assets. On a common size IS everything is a percentage of Sales. Operating Profit Margin would be gross profit/sales which would be one of the items on a common size IS
I am not sure if I am reiterating the fact said by DTM86 but in my view, the answer is due to the fact that in TAT , we take avg Asset as denominator and not asset(We take asset as denominator in common-size BS).
I think that could be part of it, but your probably could calculate TAT based on ending assets as well if you only had one year of data. But TAT also uses information from the IS which wouldn’t come into play on a common size BS
On the common sized statements, all values are a total of either total assets (on the BS), or revenue, (on the IS). Therefore, specific values on these statements will be ratios on common sized statements, as some ratios have either revenue or total assets on the denominator (both of these do). The reason that the correct answer is Operating Profit Margin, rather than Total Asset Turnover, is that while Operating profit is a value on your income statement (and therefore will be a ratio directly on the common sized IS), revenue is not a direct value on the balance sheet (it is indirectly there through retained earnings, etc). Also, TAT uses Average total assets, and you can only have a balance sheet with beginning period or ending period total assets.